Why dream of cheaper power remains elusive
Power purchase renegotiation between the government and Independent Power Producers (IPPs) has stalled as each side remains cautious about the previous complex contract, throwing hopes of sustainable cheap power soon into disarray.
Ministry of Energy announced last month that it has officially started renegotiation of power purchase agreements (PPAs) with 77 IPPs as part of wide-ranging reforms to keep the cost of electricity low. “Conversations have established good faith, forged comfort and clarified a pathway to successful negotiations (PPA) in the shortest time possible,” MoE said in a statement.
As it stands currently, none of the IPPs has received any official invitation from the ministry regarding contract review, according to the Electricity Sector Association of Kenya (ESAK), a lobby group for IPPs and private producers. “If they will finally come and call us, the expectation is that it will be a very prolonged process that can take up to one or two years for any solid arrangement,” chairman George Aluru told Business hub.
Financial distress
IPPs have always been accused of playing hardball in power cost cut negotiations and a source of financial distress, with some charging Kenya Power as high as 25 times more than KenGen’s Sh5.48 per unit rate. According to ESAK its top-producing members such as Lake Turkana Wind Power, Kipeto Energy PLC, and Rabai Power Ltd, has not been engaged in any listening session despite their commanding installed capacity which is in excess of 400 megawatts.
The lobby estimates that its 30 members can produce a combined capacity of 900 to 1,000 megawatts, about half of the capacity consumed by the country during peak demand. The cause of the stalemate now hinges on the complexity of existing PPA contracts, with some running for 20 years and the government unwilling to meet certain demands like tax reduction as presented by IPPs during discussions with the presidential task force on power purchase agreements. “It is a very complex process that will require bringing in lenders, project developers, agreeing on new numbers, redoing financial models, and legal conversations” noted Aluru.
IPPs are pushing for assurance that financial costs that they will incur in case of contract changes will be regained later, creating a basis for a legal deadlock between the two parties. Until the 2019/20 financial year, Kenya Power has been running into billions of losses, linking it to skewed power procurement processes that contribute to costly power bills.
In 2020/2021, the poor utility regained its foot, having reduced its system losses and is now banking on successful PPA negotiations to remain sustainable.
Cost structure
“The cost structure within the sector is lop-sided with the suppliers and IPPs consistently reaping profits with high returns on equity while Kenya Power and its consumers underwrite all the risks, expenses and losses,” Kenya Power chairperson, Vivienne Yeda said during the release of its half-year financial result for the period ending December 2021.
IPPs were introduced in the early 2000s to address frequent blackouts that resulted from the overreliance on the country’s hydropower dams that often went dry due to prolonged droughts.
